The entry into force of the Corporate Governance Reform Law generates uncertainty regarding the recruitment of family members by Family Companies.

Law 31/2014, of 3 December, by which the Law of Societies of Capital for the Reform of the Corporate Governance was modified with the objective of qualifying and specifying the duties and obligations of the administrators of capital companies, regulating in detail, among others, the duty of loyalty of the members of the administrative organs.

In view of this “new” regulation of the duty of loyalty of managers, we then briefly analyse the problem raised in those cases in which a Family Business intends to hire a relative related to one of the members of the administrative body.

In this case, there are, among others – but above all – those companies controlled by an entrepreneurial family in which the members of the administrative body are direct relatives of a candidate to be hired (as an employee -director or not-, supplier or customer). This situation is aggravated when it has partners and / or counsellors who are not close to the family.

Without differentiating between types of companies (for which it is applicable to S.A., S.L. and Joint Stock Companies), Article 227 of the Law of Capital Companies (Hereinafter “LCC”) establishes that “Managers shall hold office with the loyalty of a faithful representative, acting in good faith and in the best interest of the company.”

Among the main obligations arising from the duty of loyalty imposed by article 228 LCC, is “to adopt the necessary measures to avoid incurring situations in which their interests, whether for their own account or for others, may conflict with the social interest and with their duties towards society.”

That is, the administrator / counsellor should avoid incurring a situation in which his or her interests or those of a person in whose interest he acts (as is the case with persons related to him or her – which are those included in Article 231 LCC, among others, ascendants, descendants and brothers of the administrator / counsellor and their spouses) collide with the interests of the company. When there is a situation of conflict between the interests of the administrator / counsellor or its related persons and those of the company, there is an obvious risk that the administrator will prevail over the interests of the company.

In these conflictive situations, the LCC resolves the situation as follows:

  • The administrator / counsellor must refrain from participating in the deliberation and voting of agreements or decisions in which he or a related person has a direct or indirect conflict of interest (228-c).
  • The administrator / counsellor must inform the General Meeting about the operation to be carried out (229.3) and the latter may authorize the operation (230.2).

If the member of the administrative body communicates the potential conflict in which could arise in the performance of an operation which provides precise information and obtains the corresponding authorization from the General Meeting, we understand that he would have fulfilled the obligations relating to his fiduciary duty. In this way, no liability could be imposed for breach of his duty once the prohibition was dispensed with by an agreement of the General Meeting.

Given the nature and idiosyncrasies of Family Companies, in which the founder or his / her immediate family members hold the position of administrator / counsellor and are usually hired or as providers or clients to close relatives (children, spouses, grandchildren, nephews, etc.) in most cases it would be a conflict between the administrator / counsellor and the family society itself.

If the administrator / director is responsible of the conflict of interest, the action to demand may be requested by the General Meeting itself, other partners or creditors.

Therefore, it is necessary to analyse each specific case in detail, in order to determine the best way to contract with the family member, while avoiding that the administrator / counsellor incurs an eventual responsibility.

Ley de Reforma del Gobierno Corporativo